Singapore banks brace for chill from mortgage slowdown

Tue, Aug 07, 2018


SINGAPORE banks are bracing for a slowdown in the home loan space in the coming years given the latest property cooling measures, but note that most of the current mortgage book should stay intact for the rest of this year.

The chill over the property market comes alongside a new form of "cold war" amid trade tensions between the US and China. The three banks, in reporting higher earnings for the second quarter ended June 30, 2018, also flagged worries on the impact of trade conflict on the global economy, with OCBC's chief Samuel Tsien pointing out bluntly that "the trade tensions have now evolved into a trade war".

DBS, Singapore's biggest mortgage provider, has cut its property loans growth forecast by S$1 billion, given that last month's cooling measures are expected to hit sentiment. DBS has a 31 per cent share of the Singapore housing loan market. Its chief executive officer Piyush Gupta said the bank had originally anticipated putting on about S$4 billion consumer mortgages.

UOB chief Wee Ee Cheong said his "gut feel" is that housing prices could fall 5-10 per cent in time, while home loans activity should slide, following the recent property cooling measures by the government.

But Mr Wee added that while housing loan activity may drop in response to the cooling measures, this is not expected to hit the bank's home loans growth for now, given the progressive drawdown of loans booked previously.

OCBC chief operating officer Ching Wei Hong said the recent property cooling measures have "dampened sales" a bit, with activities slowing by about 10 per cent in July.

Speaking at the results briefing, Mr Ching, who is also OCBC's head of global consumer financial services, noted that the bank still expects overall mortgage growth of low to mid single-digit percentage this year.

To be sure, he noted that there is no "complete collapse" of the market, noting that demand from first-time home buyers remains fairly resilient.

OCBC also expects the impact to come from overall new loan origination in about two years from now. "But I don't think we'll see the same exuberance" as the first half, he added.

That being said, RHB analyst Leng Seng Choon said a potential loan growth slowdown from the property measures could be easily offset by a rise in Sibor (Singapore Interbank Offered Rate). "A widening net interest margin (NIM) remains the catalyst going forward," he said in a research report.

Indeed, DBS has guided for 2018 loans to grow by 6-7 per cent, shaving its earlier guidance of 8 per cent, though this also comes as it sees a stronger NIM pick-up.

It now expects the NIM to head higher by one to two basis points (bps) above previous guidance of 1.85 per cent for the full year. Its second-quarter NIM rose 11 bps from a year ago to 1.85 per cent. This brought its net interest income up by 8 per cent to S$2.22 billion.

DBS posted a net profit gain of 18 per cent to S$1.33 billion for the second quarter. The weaker-than-expected result was due to the bank's worst showing by its treasury business in at least ten years.

DBS's treasury markets income for the second quarter dropped 59 per cent from a year ago to S$107 million, due to a "perfect storm" of widened Asian credit spreads on the back of trade tensions, a flattened yield curve that impacted its bond holdings, and the equity market sell-off.

Analysts are watching this development, with Jefferies analyst Krishna Guha noting that market uncertainty could weigh on the bank's non-interest income.

Over at UOB, net interest income grew 14 per cent to S$1.54 billion, supported by loan growth of 10 per cent and an improvement in NIM by eight basis points (bps) to 1.83 per cent. Net profit for second quarter rose 28 per cent to S$1.08 billion, beating market expectations.

OCBC likewise beat street estimates on Monday, reporting a 16 per cent increase in net profit to S$1.21 billion that was driven by stronger loan growth and a slight lift in NIM. Net interest income in the second quarter rose 8 per cent from a year ago to S$1.45 billion.

Both OCBC and UOB have continued to hold to their high single-digit loan growth for the full year.

The banks are also signalling caution over macroeconomic tensions. OCBC's Mr Tsien pointed out that the bigger concern is of such conflict triggering a more inward focus among nations, as each country's market potential looks to be reduced to domestic market growth. "We're quite concerned about it... this is going to shrink the world economy."

Likewise, DBS's Mr Gupta noted: "The spillover impact really winds up with the confidence issue; it's a market psychology issue more than what really happens to the underlying trade flows."

Amid all these concerns, the digital push continues, with the banks looking to invest further in digital banking in Asia, with each bank pursuing their own versions of "digital banks". OCBC on Monday said it is pursuing an idea of a "digital bank" in Indonesia, joining UOB this month in announcing plans for such a banking move.

UOB plans to launch a "digital bank" driven heavily by data analytics for five markets in Asean: Singapore, Indonesia, Malaysia, Thailand and Vietnam. It aims to have 3 to 5 million customers in the next five years with this digital bank.

DBS in April 2016 launched digibank India, India's first mobile-only bank that is driven by technology from biometrics identification to artificial intelligence. digibank India has since acquired more than two million customers in India. DBS followed this up with a digibank in Indonesia last August. Today, some 250,000 customers in Indonesia are using it.

Analysts have warmed to the idea of banks here investing into digital initiatives. Jefferies' Mr Guha noted that in UOB's case, it helps the bank to target different segments with unsecured lending, with UOB being an asset-backed lender to mid-upper segment clients in retail banking. "If nothing else, the bank can gather customer insights and improve its operational efficiency," he said in a report.

Shares of OCBC closed on Monday at S$11.58, up 23 Singapore cents or 2.03 per cent. DBS closed at S$26.40, up 27 Singapore cents or 1.03 per cent, while UOB ended at S$27.13, up 54 Singapore cents or 2.03 per cent.